This page will be updated with notable regulatory, legislative, and litigation developments on this topic.

As the COVID-19 pandemic continues to have significant economic consequences for the US economy, a key issue for insurers and businesses throughout the country will be whether all or a portion of losses may be covered under the property insurance policies covering their businesses. Because many commercial policies likely do not provide business interruption (BI) coverage for losses occasioned by COVID-19-related shutdowns, there will be mounting legislative and regulatory pressure on insurers to pay BI losses despite what their policies say, as well as coverage litigation.

This page will be updated with notable regulatory, legislative, and litigation developments on this topic.

Overview

Standard commercial property insurance policies typically include one or more of the following types of coverage for BI-related losses:

• BI Coverage: This type of insurance covers losses when the insured property suffers direct physical loss or damage. Such damage is not necessarily limited to structural damage, as some courts have found that direct physical loss or damage can be caused by contamination of premises, such as when buildings have become uninhabitable by gases or bacteria (see Gregory Packaging Inc. v. Travelers Prop. Cas. Co. of Am., 2014 U.S. Dist. LEXIS 165232, at *15-17 (D.N.J. Nov. 25, 2014)). In any event, in order for this coverage to be applicable, the virus is required to be on the physical premises of the business; losses resulting from reduced business due to fears of the virus are not covered. Note, policies often include specific exclusions for bacteria or viruses.  Generally speaking, these exclusions were added following the SARS outbreak several years ago.
• Contingent BI Coverage: This insurance covers losses suffered by the insured due to damages to key business partners or suppliers. Thus, for this coverage, the policyholder is not required to suffer direct property damage; rather, the insurance is typically triggered if the business partner/supplier suffers damage of the type covered under the policy. To determine whether losses are covered, policy terms should be reviewed to determine the scope of the business partners/suppliers to which the coverage is applicable and whether any exclusions are applicable.
• Civil Authority Coverage: This insurance covers losses occurring when actions by local, state or federal authorities in response to damage to property other than the insured’s property prohibit access to the insured’s property. To determine whether losses are covered, policy terms should be reviewed to determine whether the insured property is sufficiently close to the damaged property to be covered under the policy and whether the specific actions taken by applicable governmental authorities meet policy requirements.

Business Interruption Coverage Data Calls

Recently, several states have issued data calls requesting information on BI coverage that property/casualty insurers write in their state. 

As reported in our prior Legal Alert, on March 10, DFS issued a 308 request to insurers authorized to write property/casualty insurance in New York related to BI and related coverage provided under commercial property insurance policies in New York. On March 25, 2020, the Washington State Office of the Insurance Commissioner (OIC) issued a letter instructing all property/casualty insurers authorized to write business in Washington to provide the OIC with certain information regarding the commercial property insurance they have written in Washington state and details on the BI coverage provided in the types of policies for which the insurer has ongoing exposure. For the purpose of the letter, “commercial property insurance” is defined to include the following, along with substantially similar insurance: business owner policies, commercial multiple peril policies and specialized multiple peril policies.

The OIC letter requires each responding insurer to provide the OIC with the volume of BI coverage, civil authority coverage, contingent BI coverage and supply chain coverage the insurer wrote that was in effect on March 15, 2020, which should be expressed in amounts of direct written premium, policy types and numbers of policies written of each type. Then, the OIC letter directs each insurer to examine the policies it has issued and explain the coverage each policy offers in regard to COVID-19 – both presently and whether the situation could develop to change the policyholder's status (i.e., is there any potential for coverage as a result of COVID-19). In addition, for each policy type, insurers are required to prepare and send to policyholders a “clear and concise explanation of benefits.” The explanation of benefits should include all relevant information including, without limitation:

• What type of commercial property insurance or otherwise related insurance policy does the insured hold?
• Does the insured's policy provide "business interruption" or “business income” coverage? If so, provide the "covered perils" under such policy. Please also indicate whether the policy contains a requirement for "physical loss or damage" and explain whether contamination related to a pandemic may constitute "physical loss or damage." Please describe what type of damage or loss is sufficient for coverage under the policy.
• Does the insured's policy provide "civil authority" coverage? If so, please describe what type of damage or loss is sufficient for coverage under the policy. Please also describe any relevant limitations under the policy. Please explain whether a civil authority prohibiting or impairing the policyholder's access to its covered property in connection with COVID-19 is sufficient for coverage under the policy.
• Does the insured's policy provide "contingent business interruption" coverage? If so, please describe what type of damage or loss is sufficient for coverage under the policy.
• Please provide the "covered perils" under such policy. Please also indicate whether the policy contains a requirement for "physical loss or damage" and explain whether contamination related to a pandemic may constitute "physical loss or damage."
• Does the insured's policy provide "supply chain" coverage? If so, is such coverage limited to named products or services from a named supplier or company? Please also indicate whether the policy contains a requirement for "physical loss or damage" and explain whether contamination related to a pandemic may constitute "physical loss or damage."
• For each instance of coverage described above, please provide the applicable waiting period under the insured's policy. Please also indicate whether the amount of time coverage remains in effect once becomes active for a given incident.

The OIC letter requires insurers to send copies of all such explanations to the OIC, along with a representation that the explanations have been provided to the insurer's policyholder.  Responses are due to the OIC by April 1, 2020.

On March 26, 2020, the California Department of Insurance issued a notice to all admitted and non-admitted insurance companies writing insurance in California requesting information related to BI coverage provided under commercial insurance policies. The notice asks insurers to provide information on the volume of business interruption coverage and explain other data elements for each policy. In particular, each insurer is directed to provide to CDI the volume of business interruption coverage, civil authority coverage, contingent business interruption coverage and supply chain coverage the insurer wrote that has not lapsed as of March 26, 2020, which should be expressed in policy types and numbers of policies written of each type, consistent with an Excel Workbook to be published by CDI. For these coverages, each insurer is directed to provide information on the following questions: 

• How many policies are covered under each coverage identified above?
• Out of these policies, how many policies fall under businesses with more than 500 employees, or alternatively, meet your definition of large business?
• Out of these policies, how many policies fall under businesses with less than 500 employees, or alternatively, meet your definition of medium size business?
• Out of those with less than 500 employees, how many policies fall under businesses with less than 100 employees, or alternatively, meet your definition of small business?

Responses are due to the CDI by April 9, 2020.

Business Interruption Coverage Legislative Roundup

Legislators at both the federal and state levels are considering whether legislative action should be taken to ensure that COVID-19-related losses are covered under BI policies.

Federal Legislative Activity

In the House of Representatives, a small bipartisan group of representatives sent an open memo regarding commercial business insurance coverage to the CEOs of the APCIA, the National Association of Mutual Insurance Companies, the Independent Insurance Agents & Brokers of America, and the Council of Insurance Agents & Brokers. In the memo, the group of approximately 20 lawmakers proposed that the insurance industry accept coronavirus-related financial losses subject to commercial BI coverage.

The industry groups quickly rejected the lawmakers’ proposal, noting that BI policies, which are approved by state regulators, “do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”

Notably, the federal CARES Act does not address business interruption insurance coverage. On March 31, the Congressional Research Service (CRS) issued a report to Congress in which it discussed the issue of BI insurance coverage.  In the report, CRS noted that some industry sources have estimated the cost of covering BI claims for small businesses to range from $110 billion to $290 billion, monthly.

State Legislative Activity

Although the federal CARES Act does not address business interruption coverage, there are proposed laws in four states that would, if enacted, require insurers to cover BI claims, irrespective of virus-related policy exclusions.

In New Jersey, the legislature failed to vote on Bill No. A3844 that would have required insurers to cover BI claims submitted by certain businesses if the claims related to coronavirus-incurred financial losses. Insurers required to pay COVID-19-related BI claims would be permitted to seek reimbursement from the New Jersey Department of Banking and Insurance, which, in turn, would apportion losses through a special assessment of all authorized insurers writing that line of business. The bill is being held for now, although there are reports that New Jersey lawmakers and industry representatives are discussing an alternative proposal.

Massachusetts, Ohio and New York have since proposed similar bills requiring insurers to cover otherwise-excluded claims arising from the coronavirus. All three states would also create a reimbursement fund. The Massachusetts law, SD.2888, would apply to businesses with as many as 150 employees, while Ohio House Bill 589, like the proposed New Jersey law and New York’s A-10226, would only apply to businesses with 100 or fewer employees. So far, only the Massachusetts bill explicitly addresses the ISO policy exclusion for viruses, which arose out of the SARS pandemic several years ago, and requires payment even where that exclusion would apply. Although the other states do not expressly mention the virus exclusion, it is likely that the bills intend to override the exclusion.  

All but a small number of states have closed their legislatures as a result of the pandemic, thus leaving these pieces of legislation in a state of limbo.

Industry Activity

With this proposed legislation as the backdrop, on March 25, 2020, the NAIC issued a statement opposing any legislative proposals that would require insurers to retroactively pay unfunded COVID-19-related BI claims that insurance policies do not currently cover. Separately, the National Council of Insurance Legislators (NCOIL) sent a letter to the Chair of the House of Representatives Committee on Small Business outlining NCOIL’s position on this issue.  In the letter, NCOIL stated that any efforts by state legislators to enact legislation that would effectively override policy exclusions, as discussed above, “would violate the Contract Clause within Article I of the United States Constitution, which prohibits the Legislature from impairing the obligation of contracts.” Instead, NCOIL proposed a solution akin to the Victims Compensation Fund that was established following the 9/11 attacks by creating a COVID-19-related fund to assist businesses with BI claims. NCOIL specifically suggested the creation of:

“a COVID-19 Business Interruption & Cancellation Claims Fund (COVID Claims Fund) incorporates the usage of the insurance industry’s claims processing systems to handle claims processing for the Fund in order to ensure all claims are validated prior to payment, removing any that do not meet the established criteria. We also would suggest that legislation establishing the COVID Claims Fund be preemptive of any State efforts to mandate business interruption coverage for the virus, for the constitutional reason discussed above.”

In its letter, NCOIL also expressed optimism that it would support the proposed “Pandemic Risk Insurance Act of 2020” (PRIA) which would create the Pandemic Risk Insurance Program (PRIP) to provide a federal backstop for insured pandemic losses, but NCOIL pointed out that its Claims Fund proposal would explicitly cover non-insured pandemic losses, including those subject to the type of exclusions discussed above.

BI Coverage Litigation

Businesses in different parts of the country have already begun filing lawsuits seeking declarations that their insurance policies cover their financial losses resulting from the pandemic.

For example, the proprietors of Oceana Grill, a New Orleans-based restaurant located in the French Quarter, filed a petition in state court on March 16 seeking a declaratory judgment that their BI coverage would cover COVID-19-related damages. The petition asserts that contamination by the coronavirus “would be a direct physical loss” requiring remediation to clean the surfaces of the establishment, and notes the applicable policy does not include an exclusion for losses from a virus or global pandemic. It also asks the court for a declaratory judgment that a Civil Authority Order by Louisiana Governor John Edwards banning gatherings of 250 or more people in a single space and restrictions on restaurants issued by the Mayor of New Orleans trigger the civil authority provision of the policy.

On March 24, two tribes in Oklahoma filed suits in an effort to recover financial losses to their casinos and restaurants, which are closed due to the outbreak.

On March 26, in California, the owner of several Michelin-starred restaurants, including The French Laundry in Napa Valley, filed a similar complaint, alleging that his insurer owes coverage for both business interruption and property damage claims. 

On March 27, a group of more than a dozen Illinois-based restaurants and other businesses filed a suit in District Court in the Northern District of Illinois against Society Insurance, Inc..  The group of plaintiffs seek a declaratory judgment that their claims for business interruption coverage resulting from the coronavirus pandemic and associated government closure orders are covered under their policies with Society Insurance.  The plaintiffs also bring a breach of contract claim and a claim for bad faith arising from Society Insurance’s denials of coverage, which the plaintiffs alleged were done in some cases preemptively and without notice by the insureds.

In light of the policy interpretation issues inherent in determining whether COVID-19-related losses are covered under BI policies, we expect an increase in policyholder litigation relating to these issues.

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